Question Three

　　This question was on the familiar topic area of cash flows and interpretation and was widely expected. Part （a）（i）required the preparation of a statement of cash flows for 12 marks followed by some focused interpretation to be able to advise the loan provider on the possible renewal of a loan （8 marks）。

　　Cash flows remain popular with candidates and those that had practiced past questions generally scored well. There were a couple of tricky areas that confused candidates：non-current assets had only increased by new finance lease agreements （which candidates did not take into account when calculating the payment of the finance lease liability）；and the taxation cash flow involved tax relief and a future refund to compute the tax paid during the year. A surprising error was that several candidates did not think the interest on the finance leases was a cash outflow. An analysis of retained earnings would have shown that a dividend had been paid，however only a tiny minority of candidates picked this up.

　　Although most candidates scored well on the cash flows，a significant number showed a lack of understanding including poor format knowledge.

　　In part （a）（ii）candidates were asked to review the available information （including their statement of cash flows） to advise on the renewal of the loan due three months after the year end. Although there were a few really good answers to this，i.e. those that focussed on the requirement，many candidates answered this as if it were a general interpretation of financial performance giving little regard to addressing the issue of whether they would advise that the loan renewal be granted.

　　The answer should have concentrated on the expectations of a lender：does the company have good liquidity， interest cover，acceptable gearing and securitisable assets. Good answers referred to the company selling its leasehold property and renting it back as a sign of an inability to generate cash flows from trading activity and that there was a year-end overdraft despite selling the property and issuing shares. Many weaker answers were dominated by profitability issues，such as profit ratios and cost control， and a detailed commentary on inventory and receivables policies，with hardly any reference to the position as portrayed by the statement of cash flows. Another problem was not understanding that the loan had ‘moved’ from non-current to current liabilities：many candidates thought that the non-current loan had been paid off and a new loan taken out. This error was also commonly presented in the answer to part （a）（i）although no cash flow（s）had taken place.

　　For the first time part （b）examined an issue relating to a not-for-profit organisation. It was a similar issue to that in part （a）（ii）in that it asked for what ratios could be calculated to decide whether to grant a loan to such an organisation. Many candidates did recognise and state that a not-for-profit organisation doesn’t have profits，but despite this then went on to describe many profit-related ratios without even trying to relate them to the types of income，expenses，assets and liabilities of a sports club. The question clearly stated that this was a separate matter to the earlier question. Despite this many candidates calculated （routine）ratios using the figures from the company’s financial statements （Deltoid） in part （a）often referring to the sports club as “the company”。 What was required in answering this section was a recognition that although the sports club is a not-for-profit organisation，granting it a loan is a commercial activity and should be decided based on similar principles to that of a commercial organisation. Thus the ability to pay interest，capital and the availability of any security is still relevant.

　　A number of answers completely ignored what the question had asked and instead just gave a rote-learned page of everything they could remember about not-for-profit organisations such as the three E’s.

　　Question Four

　　This question tested the much-examined and important topic of the principle substance over （legal）form with reference to the ASB’s ‘Framework’.Part （a）was a written section that should have been straightforward. It asked why this principle is important and what features may indicate that the substance of a transaction may be different from its legal form. Most answers started well referring to matters such as relevance，reliability and faithful representation. However the discussion of finance leases dominated many answers （to the exclusion of other issues）and few attempted to describe the features that may indicate a difference between substance and form such as the separation of ownership and control，the use of options and linked transactions.

　　Part （b）was a numerical test of the substance principle which required a short series of linked transactions to be accounted for both in their legal form and in their substance. Again，although many candidates did score some marks，it was clear that very few really understood the issues. The example was of a ‘sale’and‘repurchase’of maturing inventory. When treated in its legal form a sale （and profit） should have been recorded in years one and three with no finance costs charged. The substance of the transaction was that of a secured loan where interest was the only relevant item in the income statement in years 1 and 2 and a single sale/profit （as well as further finance costs）recorded in year three. Many candidates got very confused between the two and integrated elements of the two answers，particularly incorrectly including finance costs in the answer to the legal form. Many candidates either showed statement of financial position extracts，or mixed up items to be reported，when the question clearly stated only income statement extracts were required.

　　Part （c）asked how the two different treatments might affect an interpretation of the company’s performance. Where candidates had got the numbers correct in part （b）they tended to do quite well in this section；not surprisingly，if candidates did not understand the numbers they couldn’t understand their interpretation.

　　The main points were that neither method affected the overall profit （over the three years）on the transactions （although many thought it did）with the main differences being in the timing of recognising profit and the classification of costs in the income statement. The more substantial differences being in the statement of financial position where，under the substance method，inventory and the loan were included as assets and liabilities respectively. This would have 'knock on' effect on ratios such as ROCE，gearing and inventory utilisation.

　　Question Five

　　This question was based on the relatively infrequently examined topic of borrowing costs and as such caught out many candidates who had not covered this in their revision. A considerable number of candidates did not attempt this question. Those that had studied the topic scored well thus answers tended to be very polarised，either very good or very poor.

　　Part （a）asked for the circumstances when borrowing costs should be capitalised. This should have proved straightforward. An answer such as ‘Borrowing costs relating to assets that take a substantial time to complete are capitalised at the effective rate interest from the date construction starts and should end when the asset is ready for use.’would alone have attracted at least three of the five marks available for this part. Further discussion of the suspension of capitalisation where construction activity is suspended and the deduction of any （temporary） investment income from capitalised cost would have been all that was necessary to gain the full marks.

　　Instead many answers just guessed at the rules or interpreted the requirement to be about what other costs could be capitalised during the construction of non-current assets （the topic of a recent past question）.

　　Part （b）was a numerical example designed to put the above rules into practice. The main errors made by candidates were using the nominal/coupon rate of 6% instead of the effective rate of 7.5% to calculate the interest to be either capitalised or expensed and not correctly calculating the period of capitalisation. A number of candidates spent time calculating what the liability for the loan would be in the statement of financial position – this was not asked for and gained no marks.

　　Conclusion

　　As reported in the introduction，the overall performance of candidates was very disappointing with too many candidates simply not doing enough studying to prepare themselves for answering questions across the breadth of the syllabus，in effect hoping to pass by answering three questions. Poor examination technique was much to fore， particularly not reading or interpreting several of the question requirements properly，especially in respect of the written questions. The worst performing candidates did not show an understanding of F3 material and could not therefore do themselves justice. It was also apparent that many candidates had done little if any practising of recent past examination questions.

　　The above comments should not detract from the very able candidates who obviously worked hard and were rewarded with good marks.

　　ACCA2010年12月考试时间：12月6日-15日

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